Beijing glimpses a Middle East energy consolidation, by replacing France's Total in South Pars gas expansion venture

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By the beginning of August, Total will know whether or not it has a future in Iran. The Iranian authorities have given it two months to seek an exemption from US sanctions on their country. Total is involved in the Phase 11 development of the huge offshore South Pars gasfield, which is shared with Qatar—with the Qataris calling it the North Field. As recently as April, the French firm issued tenders for sub-contracts for South Pars, still hoping for a miracle.

The chances of the Trump administration allowing Total to ignore sanctions are remote. Furthermore, the likelihood is that France's loss will be China's gain. For Iran's oil minister Bijan Zanganeh said recently that "if the US administration does not agree with Total staying in Iran, China will replace this company".

China National Petroleum Corporation, expecting that Trump would target Iran over the nuclear issue, has been making preparations for several months to step into Total's shoes. Chinese state firms are also bidding for four onshore blocks in Iran.

If CNPC does indeed enter South Pars, then it will be a further and important step along the path of China deepening its energy ties with the Middle East. China badly needs new and secure hydrocarbon sources beyond its borders, and the Middle East is one of its key target regions.

When it comes to oil, the figures demonstrate clearly why this is the case. China's domestic crude oil production is in decline, while demand is increasing. In 2017, it produced 3.8m barrels a day, a fall of 150,000 b/d on 2016—and the third annual decline in succession. The overall picture is even worse—according to the US Energy Information Administration, imports rose from 2m b/d in 2004 to 8.4m b/d in 2017. China has now overtaken the US as the world's biggest crude importer.

At present, Russia is China's largest single supplier of crude oil, with exports soaring from 665,000 b/d in 2014 to 1.2 million b/d last year. Russia and China are also doubling the capacity of the East Siberia-Pacific Ocean oil pipeline to 600,000 b/d, raising the prospect of increasing volumes of Russian crude entering the Chinese market.

Despite growing competition for market share, three countries of the Gulf Cooperation Council—Kuwait, Saudi Arabia and the United Arab Emirates—remain key suppliers; along with Iran and Iraq.

Kuwait's exports to China rose from 208,000 b/d in 2012 to 363,000 b/d in 2017, while the export rates from Saudi Arabia and the UAE fluctuated slightly over the same period. Outside the GCC, Iran's sales to Chinese buyers rose from 438,000 b/d in 2012 to 621,000 b/d last year, while Iraq's more than doubled from 313,000 b/d to 738,000 b/d.

Total exports to China from these five Middle East oil states rose from 2.2 million b/d to nearly 3 million b/d in the 2012-17 period—accounting for about one-third of Chinese crude oil imports.

Among the small Gulf producers, Oman's crude oil exports to China rose from 598,000 b/d in 2014 to 624,000 b/d in 2017. China is Oman's biggest market for crude oil, accounting for close to 80% of total exports. Qatar tripled its crude exports to China between 2014 and 2017, recording 21,000 b/d in the latter. Chinese companies are also active in Iraq, the Kurdish region of northern Iraq and the UAE, as well as Egypt, South Sudan and Algeria.

Whenever IOCs bow out of potentially rich hydrocarbon regions in the Middle East, or are forced to leave, expect China to be ready and willing to take over. Its hunger for oil and gas doesn't look like diminishing soon.